BEIJING, China — Gao, who only wishes to give her family name, has good reason to be discreet. When she tried to shop at a prominent online luxury retailer based in the UK, she ran into an unexpected burden that prompted her to use an illicit trade instead.

“I ordered two products,” she tells BoF, from Beijing, where she lives. “But when DHL received the parcels last week, they called me up to say that the parcel could not pass through China’s customs. I had to return my order and get a daigou to do it for me instead, [because] the daigou would deliver the parcel to me and not report the value inside.”

Due to hefty import tariffs and consumption taxes, as well as higher pricing strategies, prices for luxury goods can be 20 to 30 percent higher in China when compared to abroad. The disparity has given rise to daigou, a grey market trade where shopping agents purchase goods overseas and sell them back to customers in China, typically making a profit and saving the customer money at the same time, by avoiding import duties.

But after years of watching the illegal trade grow, the Chinese government has recently stepped in to tackle it by lowering import tariffs and tightening customs controls. Unfortunately, what Gao’s experience highlights is that some of these new measures have inadvertently created barriers for Chinese consumers who want to use legitimate channels to buy online. “It’s ridiculous,” she says, describing how the frustration and confusion left her feeling “forced to use daigou.”

“Either I cannot buy more than one item at a time…or the total value cannot be more than 1,000 RMB (about $152). If the goods are less than 1,000 RMB, you pay the tax, but if they’re more than 1,000 RMB, your parcel will be returned. [So I have to either] order them separately and pay [double] DHL overseas shipping fees, or use a daigou," she continues.

Authorities have been tightening the inspection of imported goods to combat ‘bi shui,’ a buzzword in anti-graft era China. “It means tax avoidance or tax evasion, it has a bad connotation,” explains Alice Wong, president of ImagineX Group, a management and distribution group in China that represents luxury brands including Marc Jacobs and Salvatore Ferragamo.

As a result, cross-border commerce has been problematic for Chinese mainlanders. David Zhao, founder and chief executive of e-tailer Shangpin, which offers brands such as Chloé, Topshop and Lanvin in China, says that since September, many people have reported trouble at customs. “I’ve seen people losing their parcels for no reason.”

In addition, legislation announced in August 2014 by the country’s General Administration of Customs declared that travellers must pay extra customs duty for any “personal use” products that are worth more than 5,000 RMB (about $760) — which is how daigou goods are typically labelled.

“Many consumers are aware that the practice [of daigou] is synonymous with ‘bi shui,’ but they take the risk anyway because they can get products cheaper,” says Wong. “With these new regulations in place, many daigou agents won’t be able to remain competitive and this will benefit proper cross-border channels.”

When you see someone in a store, you don’t know whether they are buying handbags for themselves or to sell them onto the market in China.

The daigou trade became so widespread so fast that in 2014 its value grew by 20 billion RMB ($3 billion). Over the course of just 12 months, the value of the daigou business for luxury goods swelled from 55 to 75 billion RMB ($8.8 billion to $12 billion), management consulting firm Bain & Company estimated. However, in 2015, the daigou market decreased to approximately 43 billion RMB ($6.5 billion) marking what some consider to be a turning point.

“We saw notable changes in where and how Chinese consumers acquired luxury goods last year. Buying overseas has been a trend for years…but daigou is declining because of multiple and converging drivers from major industry players, including the government,” says Bruno Lannes, a Bain partner based in Shanghai.

The government certainly has an incentive to curb the daigou market. Not only is the practice of daigou illegal, but each purchase outside China represents tax revenue they are not collecting. “Over the past 30 years, Chinese people have become very capable, with a lot of purchasing power. But all this money goes out [the country]. The government wants it to be consumed here,” says Shangpin’s Zhao.

In December, China’s Ministry of Finance announced that it would lower import taxes again, having previously cut them in May. Tariffs imposed on some 800 imported products, including handbags, clothing, sunglasses and suitcases, would be slashed as of January 2016. Tax for clothing would drop from between 14 to 23 percent, to 7 to 10 percent, and taxes on footwear would be reduced from 22 to 24 percent, to just 12 percent.

“The biggest driver fuelling daigou is the price difference between imported luxury goods in China and luxury goods sold overseas. Lower import duties on luxury items will make the price difference less significant for customers, therefore the whole business will be less lucrative for agents,” argues ImagineX’s Wong.

However, import tariffs are only one of the three taxed levies on foreign imports, says Zhao. “China also charges VAT (value-added tax) and consumption tax” — both of which have been left unchanged by the authorities.

Indeed, the lack of global price alignment across major markets is what feeds the daigou trade, especially as the Internet has created global price transparency for borderless consumers shopping around the world.

Chanel, Gucci and Cartier have tried to address this unilaterally. Chanel was the first to raise its European prices by 20 percent while cutting them in China, closing what had been a price gap that forced China’s customers to pay significantly more than they would in other major markets. “More price adjustments [are] expected in 2016, helped by the RMB depreciation,” says Bain’s Lannes.

Meanwhile, some luxury brands have started watching their customers more closely. “We’ve placed strict retail restrictions for the amount of products that people can buy,” Jean-Jacques Guiony, chief financial officer at LVMH, said at an investor conference call in 2015. “When you see someone in a store, you don’t know whether they are buying handbags for themselves or to sell them onto the market in China. We are trying to make sure we are not competing with our own products in the China market, but our actions are not entirely bullet-proof.”

“Many of the purported Chinese ‘consumers’ at major Western retail locations are in fact re-sellers,” agrees Brian Buchwald, co-founder and chief executive of consumer intelligence firm, Bomoda.

“But while daigou agents serve as intermediaries, a good number of brands have become unknowingly reliant on these shoppers to prop up retail numbers in locations ranging from New York to Paris to Tokyo,” he claims. “From a marketing perspective, many major brands owe a significant portion of their social media marketing and engagement to daigou. Brands like Michael Kors and Tory Burch see approximately 50 percent of the posts mentioning them in Chinese social media written by overseas consumers. A meaningful percentage of those messages are created by daigou.”

On the other hand, Dr Zhou Ting, chief operating officer of the Fortune Character Institute, a China-based research centre, believes that tightening customs controls can help restore the public image of some luxury brands. “Lots of daigou agents cheat customers with counterfeit products. In fact, many of the fake luxury goods in China come through the daigou channel. This has partially damaged customer confidence in those brands,” she says.

Looking ahead, luxury brands should be focused on “cross-border commerce and unifying global pricing,” says Wong. “Chinese consumers are more and more willing to find great products at best prices, so luxury brands have to rethink their strategy to ensure that the China market remains attractive to domestic consumers.”

Alibaba-run payment system ePass takes care of logistics such as shipping and customs. While this option isn’t completely duty-free, Chinese consumers have the option to buy from a much wider selection of brands than before, including Asos to Gap. Alipay’s ePass partner platform, Borderfree, also allows international retailers, such as Bloomingdale’s, Macy’s and Saks Fifth Avenue, to access logistics services in China. And major foreign e-commerce players, such Net-a-Porter, have launched a Chinese version of their sites.

“Whether a consumer buys directly in a Burberry store in London or Bicester Village or on Burberry.com or Net-a-Porter… companies need to have a better global and integrated merchandising and marketing strategy, combined with global intelligence and CRM [customer relationship management] tools,” says Buchwald.

But until luxury prices and products in China come closer to those abroad, daigou agents will continue to have a captive audience and the demand for grey-market goods will remain.

“Even in the face of a weaker yuan and market volatility… personally, I don't believe that a more muted daigou industry will mean that much for luxury brands in terms of how much they'll sell at physical stores in China,” says Avery Booker, a partner at China Luxury Advisors.